How Do Stocks Trade?

You hear the phrase all the time: trading stocks. But you know what? It's wrong. You don't trade stocks like you do, say, marbles or baseball cards ("I'll trade you 10 of my Googles for 10 of your Dells").

Even the term "stock exchange" is misleading in the sense that you're not exchanging one stock for another; you're exchanging it for money, or vice versa. Therefore, to trade or exchange stock really means to "buy and sell."

How a system can effectively accommodate the trading of over 1 billion shares a day is a mystery to most people, and for good reason. Luckily, you don't need to know all the technical ins and outs of how stocks are bought and sold. But you should have a basic understanding of how the various markets work.

To begin, it's important to understand the difference between the "primary" market and the "secondary" market. In the primary market securities are created by means of an initial public offering (IPO), while in the secondary market investors trade already-issued securities. When people refer to the stock market they're really referring to the secondary market.